Meet Bishop Eaton

The Rev. Elizabeth A. Eaton was elected as the ELCA’s fourth presiding bishop at the 2013 ELCA Churchwide Assembly. Born in Cleveland on April 2, 1955, Eaton earned a Master of Divinity degree from Harvard Divinity School...

Luther and Lutheranism

Martin Luther was eight years old when Christopher Columbus set sail from Europe and landed in the Western Hemisphere. Luther was a young monk and priest when Michaelangelo was painting the Sistine Chapel in Rome...

ELCA Good Gifts Catalog

Assignment Process

Assignment completes candidacy for all people, including those ordained in another Lutheran church or Christian tradition, moving them toward first call and admittance to the appropriate roster in the ELCA...

For more information, please visit www.iccr.org, or call
212-870-2295.

[1] To say that 2001 and 2002 have been watershed years for
corporate governance would be an understatement. The most obvious
contemporary example of what can go wrong in corporate governance
is Enron. The news that Enron's board of directors granted waivers
from Enron's code of ethics allowing officers of the company to
engage in the transactions that contributed to the company's demise
is one example of many of what can happen when corporate governance
serves the interests of managers at the expense of other corporate
stakeholders, including not only shareholders but employees.

[2] But to say that Enron represented a failure in
corporate governance leads to a more fundamental question: what is
corporate governance?

[3] Of course, the holy books of religious organizations
are silent on a number of issues directly related to corporate
governance. The Bible, for example, does not provide guidelines on
how many independent directors a corporate board should have. But
the principles that have underpinned work on corporate social
responsibility are actually quite helpful in thinking through
corporate governance-related issues.

[4] For the first entry point into this debate, I draw
from my other profession: teaching strategy to undergraduate
students at the University of Northern Iowa's College of Business
Administration.

Corporate Governance: A
Definition

[5] The textbook I use for this course offers an
interesting definition: "corporate governance represents the
relationship among stakeholders that is used to determine and
control the strategic direction and performance of
corporations."1
Corporate governance is often discussed in terms of what's good for
shareholders; here the idea is that boards of directors and
corporate managers should serve the interests of shareholders, who
own the company.

[6] The above definition is quite helpful in thinking
through how religious institutions might shape the emerging debate
about corporate governance. A focus on stakeholders (including but
not limited to shareholders) rather than shareholders alone might
allow religious institutions -- particularly institutional
investors -- to bring together long-standing concerns about social
and financial performance.

[7] Four issues in particular -- risk and reward sharing,
participation, consent, and fairness -- are particularly helpful in
this regard.

Risk Reward and Sharing

[9] Boards of directors often claim that their goal is to
"maximize shareholder value." Here the line of analysis focuses on
the issue of risk: shareholders take a risk in investing in a
company; as residual claimants they only get what is left over
after all other stakeholders' contractual claims are satisfied.
Proponents of this decision rule often argue that stakeholders like
employees are protected by their ability to negotiate the terms of
exchange with organizations.

[10] But it is clear that every stakeholder is taking a
risk in helping a corporation achieve its goals. The employees of
Enron who "invested" their skills with the company took a risk that
ultimately did not pay off. There are other stakeholders who take
risks as well, such as communities that host polluting company
facilities. And employees who work for companies around the world
risk their health when they work in dirty, unsafe plants. In the
absence of the contributions of any one stakeholder group, a
corporation ceases to be successful.

[11] Interestingly, contemporary corporate governance
mechanisms often reduce risk--for corporate managers. When a
company re-prices its senior managers' stock options that are
worthless because the company's stock price has fallen, it is
essentially eliminating any risk associated with executive
compensation.

[12] Yes, shareholders take a risk when they invest in a
company and deserve some sort of reward for doing so. But religious
institutions have insisted that every stakeholder takes a risk in
helping an organization achieve its goals. One goal of corporate
governance should therefore be to spread risk and reward
equitably.

[13] Participation Let us consider who specifically
participates in corporate governance. The traditional
conceptualization of corporate governance starts with shareholders,
who vote for members of the board of directors; ideally, the board
of directors monitors the officers and managers of the company in
place of shareholders.

[14] It has been clear that boards of directors do not
always do a good job of monitoring boards of directors, but this
observation is not at all new. Adolf Berle and Gardiner Means, in
their classic 1932 study The Modern Corporation and Private
Property,2
proposed that when there are many shareholders who are continually
buying and selling stock, the ability of individual shareholders
(or shareholders as a whole) to meaningfully participate in
corporate governance is quite limited.

[15] One criticism of corporate boards is that they are
self-perpetuating. Current board members select future board
members and then ask shareholders to elect the slate that has been
presented. Indeed, some of the most egregious corporate governance
problems of recent years can be ascribed to boards that are not
independent because of large insider membership or high rates of
board compensation that make board members unwilling to challenge
management.

[16] If shareholders often find it difficult to
participate meaningfully in corporate governance, what about other
stakeholders? Employees, for example, generally do not participate
in corporate governance at all -- even though their efforts
ultimately make the corporation successful. The case for employee
participation in corporate governance is quite strong, both from an
ethical and an instrumental standpoint. Here's what Ram Charan and
Jerry Useem wrote on the latter point in the May 27, 2002 issue of
Fortune: As the Enron debacle has proven, regular employees -- not
executives, not directors, not shareholders -- have the most to
lose when a company fails. With their jobs, pensions, and
stock-option wealth on the line, it follows that they have a
greater incentive than anyone to act as company watchdogs. Yet few
companies tap this built-in alarm system. Too often, front-line
employees smell something rotten but do not, or cannot, convey the
message upward. That's why companies need a mechanism to make it
happen. Shareholders, employees, and communities -- to name but
three stakeholder groups -- have a stake in a corporation's
success. Corporate governance mechanisms that do not include all
three groups as participants are likely to lead to harmful effects,
both for the company and its stakeholders.

[17] Consent Related to the issue of participation is
consent. In recent years, religious institutions have done much to
bring together issues of power and consent into analyses of
corporate social responsibility. In my own research, I have
discussed how real participation and consent are necessary to
ensure that corporations do not use their power to exploit
stakeholders.3

[18] When employees, for example, don't get to participate
in corporate governance or give their consent to the terms of
exchange with a corporation, they are likely to be exploited. (This
is why religious institutional investors have insisted that freedom
of association and the right to seek collective bargaining is so
important, especially in countries where there is not strong
government regulation of the employment relationship). Similarly,
analyses of environmental racism focus on structural issues of
power in society: poor communities and communities of color are not
consulted in plant sitting decisions, and their consent to have a
polluting plant put in their communities is not sought.

[19] Both Jewish and Christian social thought are
sensitive to issues of power and unfairness. One of the points that
religious organizations continually bring up with companies is that
real consent and participation for a corporation's stakeholders is
normatively good. Corporate governance mechanisms need to ensure
that real participation by corporate stakeholders leads to the
extension of real consent by them.

[20] Fairness When real participation and consent are
absent, the risks borne by employees, communities, and even
shareholders may not be compensated fairly. Consider the case of
employees in many countries around the world. Their participation
and consent are not sought by corporations. The unhappy result is
that these employees often work in horrible conditions for
starvation-level wages, even though their labor makes the
corporation highly profitable.

[21] When there is real participation and consent by a
particular stakeholder group, that stakeholder group is likely to
be treated fairly by the corporate managers who make day-to-day
business decisions. In most U.S. corporations, only shareholders
have a direct role in corporate governance -- and as previously
noted, even this role is quite limited and fraught with
problems.

[22] Yet, religious groups have consistently argued that
all of a corporation's stakeholders, not just shareholders, deserve
respect from corporate decision makers because every individual is
created in the image of God.

[23] A system of corporate governance that does not
provide for real participation and the extension of consent by all
of a corporation's stakeholders will inevitably lead to their
unfair treatment. Indeed, corporate governance concerns not only
the relationship between shareholders and managers, but rather all
of the decisions made by managers about how different stakeholder
groups are treated and how different stakeholder groups might
participate in decision making to both protect their interests and
to help the corporation be successful. Where there are violations
of human dignity, a lack of consent and participation almost always
exists.

[24] A new future for corporate governance Properly
understood, corporate governance should be a significant concern
for religious institutions. This is a teaching moment, I believe:
religious institutions have an opportunity to make a broader point
about how particular stakeholder groups, particularly employees and
communities, are treated by corporations.

[25] So many of the issues that we have addressed since
the early 1970s -- whether apartheid or environmental
irresponsibility or the sale of military goods to oppressive
regimes -- can be traced back to a lack of stakeholder
participation and consent. Although it may be distressing that
corporate governance has come to the fore only when shareholders
have suffered losses, companies like Enron illustrate what happens
when stakeholders are excluded from governance processes.

[26] At its root, the corporate governance scandal at
Enron involved the corporation's managers making decisions about
the company that benefited them at the expense of shareholders,
without informing shareholders or asking for their consent. The
ethical analysis of relationships between corporations and
employees, for example, in countries where there is little concern
for worker safety or freedom of association is essentially the same
as the analysis of Enron's relationships with its shareholders and
employees.

[27] Real stakeholder participation in corporate
governance should therefore be understood as an ethical minimum,
although the forms that such governance would take still need to be
sketched out, stakeholder by stakeholder. But real stakeholder
participation in corporate governance might also lead to improved
corporate financial performance.

[28] How much better off would Enron's shareholders be,
for example, if employees at all levels of the company had been
able to act as one set of corporate governors? If it is the case
that all stakeholders assume risks in the hope of receiving rewards
from their participation in a corporation's activities, then it
follows that they should have some role in determining that
corporation's strategic performance and direction. Corporate
governance, therefore, properly belongs to all stakeholders and not
just shareholders.

[29] Much more can and should be said about corporate
governance and how it should best be structured. Religious
institutions have long witnessed to the inherent worth and dignity
of every person and community. Taking up the issue of corporate
governance is therefore a natural extension of this important work.
It would be tragic if the opportunity that religious institutions
have to address how corporations are -- and ought to be -- governed
is allowed to pass.

This is Christ's church.

There is a place for you here.
We are the church that shares a living, daring confidence in God's grace. Liberated by our faith, we embrace you as a whole person — questions, complexities and all. Join us as we do God's work in Christ's name for the life of the world.